http://www.icis.com/blogs/asian-chemical-connections/ en Copyright 2009 Fri, 03 Jul 2009 08:23:17 +0000 http://www.sixapart.com/movabletype/ http://blogs.law.harvard.edu/tech/rss as this article from ICIS news points out. Demand from converters in south China is reported to be weak; hardly surprising given the chart below from The Wall Street Journal which indicates that China's economy is 36.5% dependent on exports with south China the heartland of China's export sector. No matter what the wisdom of the Chinese government's huge fiscal stimulus aimed at boosting local demand, a sustained recovery in Western consumer spending remains crucial for China's economic health over the next few years. You have to doubt the wisdom of the stimulus packages because China could well be borrowing from the future to pay for growth today. And secondly, as we discussed earlier this week on this blog, the enormous increase in loan growth will put China's banking system under pressure. Chemical prices have risen in tandem with crude prices and with the broader sense of optimism - reflected in equity markets - that the worst of global economic crisis might be over. True, the rate of declines in the real economy might have slowed down but as Mohamed El-Erian, chief executive and chief investment office of Pimco, argues in this Financial Times article "it is going to take time to restructure an economy (the US) that became over-dependent on finance and leverage. Meanwhile, companies will use this period to shed less productive workers." This could mean US unemployment will only peak at 10.5-11% and not until 2010. Yesterday saw the release of jobless figures for June which indicated a 467,000 drop in employment, raising the current jobless rate to 9.4% from 9.5%. I am sticking to my belief that a sharp correction in polyolefins pricing is likely very soon with markets set to get a dreal longer when the Asian turnaround peak season ends - and when new capacity comes online in China and the Middle East Evidence of this is clear from the ICIS Ethylene Worldwide Report, which is soon to be relaunched. As this slide shows detailing China alone (and the picture looks equally disturbing for the rest of the world, also of course including the Middle East), capacity is set to sharply increase as maintenance work tapers off. View image But there might be more start-up delays and of course we don't know the maintenance schedules for next year. Clearly the risks are high, though, for any petrochemicals producer or buyer (I think what I've said for olefins and polyolefins applies to many other products) that has swung from the fear of Q4-Q1 last year to over-optimism. If production or buying have been ramped up by too much and inventory levels have once again been badly managed, the risk of heavy losses from the bursting of this mini-price bubble remain high. For the cautious and prudent company - and for the likes of Ineos and Dow Chemical that have taken opportunities to refinance during the current stockmarket boom - though, the prospects might not be that bad. But for everyone, evidence of a real improvement based on stronger global consumer spending has yet to emerge. Indeed, if El-Erian's analysis is correct overall consumer spending on the things made from chemicals might get worse in H2 this year and throughout 2010. And as foor beyond the end of next year, again, since I've been away nothing has really changed. This comment from the economist Nouriel Roubini - although a bit dated as it's from May - still rings true: "We cannot rule out a double dip W-shaped recession with the wings of a tentative recovery of growth in 2010 at risk of being clipped towards the end of that year or in 2011 by a perfect storm of rising oil prices, rising taxes and rising nominal and real interest rates on the public debt of many advanced economies as concerns about medium term fiscal sustainability and about the risk that monetization of fiscal deficits will lead to inflationary pressures after two years of deflationary pressures." ]]> http://www.icis.com/blogs/asian-chemical-connections/2009/07/where-is-the-real-demand-recov-1.html http://www.icis.com/blogs/asian-chemical-connections/2009/07/where-is-the-real-demand-recov-1.html China Company Strategy Economics Naphtha & other feedstocks Oil & Gas Polyolefins US China economy China stimulus package China's banks China's economy inventory management mini bubbles Nouriel Roubini Pimco the Financial Times the Wall Street Journal Fri, 03 Jul 2009 08:23:17 +0000 As I've been warning on this blog for some time, the explosion of credit in China has created a great deal of paper-bottomed optimism over the recovery. Fitch, the ratings agency, has just raised its macro-prudential risk indicator ffor China from category 1 (safe) to category 3 (Iceland et al) because of the lending surge and public debt. China's Banking Regulatory Commission warned last week: "The top priority at the moment is to stop explosive lending. Banks should carefully monitor the process of credit approval and allocation, and make sure that loans flow into the real economy." And Andy Xie, the often-quoted Sino-bear, says in the same article I've linked to above from The Daily Telegraph: "Commodity speculators have been using cheap credit to play the arbitrage spread between futures and spot on the oil markets. They have even found ways to trade lumber to iron ore by sheer scale of leverage. "They've made everything open to speculation." This is probably one of the main factors behind the boom in speculation in linear-low density polyethylene (LLDPE) futures on the Dalian Commodity Exchange. PVC futures were also recently launched on the exchange. As my fellow blogger Paul Hodges points out on his blog, Chemicals & The Economy, China is at risk of repeating the mistakes of the West: an unsustainable rise in credit. The obvious danger, as has been flagged up before, is a sudden collapse in chemicals demand and pricing as inventories are unwound (built up with too-easy) as tougher lending conditions are imposed. This could be an even more dramatic bursting of the current equities and commodity price bubbles if it occurs at the same time as sharp fall in crude (which seems likely if equities are hammered. ]]> http://www.icis.com/blogs/asian-chemical-connections/2009/07/back-to-the-serious-stuff-fitc.html http://www.icis.com/blogs/asian-chemical-connections/2009/07/back-to-the-serious-stuff-fitc.html Business China Europe Markets Oil & Gas Polyolefins US bear-market rally China Banking Regulatory Commission China banks China economic stimulus China economy China lending China lending crisis China's banks China's economy Dalian Commodity Exchange mini bubbles Wed, 01 Jul 2009 09:49:38 +0000 Picture: The Daily Mail Ok, I lied - I am having trouble getting back into my petrochemicals bubble and so this post is not about polypropylene. Apologies to all those disappointed C3 H6 molecules out there. I was sharing lunch with a highly demotivated Singapore-based chemicals industry employee recently and the great British 1970s sitcom, The Good Life, came to mind (see above picture for the full cast - don't you just love the clothes?). In that sitcom, Tom Good, played by the actor Richard Briers, is meeting "Sir", the boss of the plastics processing company where he works as a draftsman. The company specialises in desiging and molding those little plastic toys you used to get (or might still get - I am not sure) free in your breakfast cereal. "Sir" puts his arm around Tom, who he has noticed for the first time because he has been introduced by his friend Jerry, played by the late and great Paul Eddington, as "our top designer". Jerry is a monumental crawler and, as a result, is in an executive position. Anyway, "Sir" says to Tom, or roughly words to this effect: "A new bubble has just come off the top of our think tank and I want you to take charge of this project - plastic hippopotamuses (or was it giraffes? Couldn't find on Google). Are you excited? Do you think you are the man for the job?". He is speaking in one of those annoyingly enthusiastic voices you may have heard in meetings and wished "if only I could have the presence of mind to fake it that well". Tom, is of course, supposed to show enthusiasm in order to crawl up the slippery corporate ladder, but instead bursts out laughing, goes home, quits his job, and decides to become self-sufficient by growing all his own food - and keeping lifestock - in his suburban back garden. To return to my lunch with the unhappy chemicals-industry employee, he had been ground down by having to bite his tongue in so many long and dull meetings that when his boss asked for ideas for a new corporate slogan, he replied: "How about 'The Relentless Pursuit of Mediocrity?' ". He lives in a condo with a window box as a back garden and so growing fruit and vegetables for a new career is not option. Anonymous contributions would be gratefully received for comments you would have liked to have made in company meetings, but felt unable to do so. This is your chance to let off some steam. ]]> http://www.icis.com/blogs/asian-chemical-connections/2009/06/the-relentless-pursuit-of.html http://www.icis.com/blogs/asian-chemical-connections/2009/06/the-relentless-pursuit-of.html Business Company Strategy Managing people Polyolefins Singapore BBC chemicals employees company meetings plastics processing polypropylene The Good Life Tue, 30 Jun 2009 07:07:00 +0000 Cartoon: Peter Brookes, The Times Yes, this blog has gone staggeringly quiet over the last few weeks as I gained a life: I went home to the UK and mixed with some people who had no interest in or desire to know anything about polypropylene. Do you realise that there are some people out there who have never even heard of catalytic reformers? Amazing.... Anyway, before I return to my sad little petrochemicals bubble, here are some reflections on the political chaos gripping good old Blighty caused by MPs' expenses. The pleasure the Brits are deriving from their fuming indignation over some upper-class twit claiming the cost of cleaning out his moat, and other such extraordinary fiddles, almost makes up for the misery inflicted by collapsing house prices. But as I kept saying over many a pint of wonderful British real ale during my leave: "Corruption? Call this corruption. If you want real, decent corrupt politicians then go to India or the Philippines, to name but two Asian countries affected by this problem. "The good people there would be delighted if all that their political leaders did was claim the odd household plant or a bit or mortgage tax relief off the State." It's good fun to have a go at politicians, though - God knows they all deserve it. And there is never any excuse to fiddle your expenses and quite obviously, all the journalists enjoying the hunt have never, ever over claimed or falsely claimed for anything (you can be probably tell, except if you are American that is, that this is intended to be sarcastic). I had a friend many years ago who worked on a national newspaper who received a major telling off for not claiming enough fraudulent lunches, dinners and gallons of alcohol, the reason being that if the accountants saw one person managing on less everyone else might have been forced to follow suit. Most national newspaper journalists, certainly in the 1990s anyway and so this may have changed, could double their salaries by being on the fiddle. But in the row over MPs' expenses perhaps not enough focus is being placed on a much bigger issue. This is how Britain is going to repair its government finances without creating major inflation problems or interest-rate hikes that will limit inflation but nip the recovery in the bud. The same applies, of course, to the US. I don't pretend to understand Bond yields etc. Perhaps nobody understands, nobody has control, nobody has a flipping clue and so in the absence of any clarity the only debate worth having is over why the former Home Secretary's husband, working as a government-paid political assistant, claimed porn movies on his expenses (still my favourite of all the scandals). Toodle pip. I promise you in my next post that I'll write about polypropylene for all you fellow sad people out there. ]]> http://www.icis.com/blogs/asian-chemical-connections/2009/06/does-anyone-have-a-clue.html http://www.icis.com/blogs/asian-chemical-connections/2009/06/does-anyone-have-a-clue.html Aromatics Business Economics Europe Polyolefins US catalytic reforming Jamie Oliver MPs expenses on the fiddle polypropylene real ale Thu, 25 Jun 2009 22:47:38 +0000 Source: The Guardian newspaper Apologies for letting this bog slip again. I am on leave, but still pondering where on earth we are heading. This makes a welcome relief from staring up at the grey skies and thinking "summer? What summer?" Yes, I am on leave in the UK and Wimbledon is about to start. I would recommend moving the tournament to drought-affected areas of the world, maybe on an annual rotation basis, to guarantee rainfall. Anyway, back to the business of oil prices. If you succeed in making acrylic acid from enzymes and microbes, as the company Novozymes is attempting to do, then maybe you can worry slightly less about the long-term likelihood of very high crude prices. But as oil hits $70/bbl again, the old concern about boom and bust cycles driven by energy costs has to be very much in the forefront of everyone's minds - whether or not they are trying to break the direct link between oil and chemicals. As the excellent Buttonwood column in The Economist points out, we are back in a commodities supercycle. The 45 cents a gallon rise in gasoline prices over the last month is costing the American consumer an extra $60 billion. As confidence in the economic recovery increases, might we soon be back to square one? What are the solutions for the chemicals industry? ]]> http://www.icis.com/blogs/asian-chemical-connections/2009/06/raining-on-the-optimists-parad.html http://www.icis.com/blogs/asian-chemical-connections/2009/06/raining-on-the-optimists-parad.html China Company Strategy Economics Knowledge management Naphtha & other feedstocks Oil & Gas boom and bust cycles foul British weather ol prices tennis The Economist Wimbledon Thu, 11 Jun 2009 09:09:41 +0000 It's easy to get caught up in the excitement over the rebound in the Chinese economy and miss underlying weaknesses which point to some major problems ahead. To some extent, in a desperate effort to compensate for collapsing export trade, China might have borrowed from the future in order to achieve a swift recovery. "The (Chinese government's economic) stimulus programme borrows from a future investment cycle," writes the online research publication, the China Economic Quarterly (CEQ), in its Q2 report. "Since 1978 China has run relatively regular five-year investment cycles followed by five years of retrenchment." Spending by the State on infrastructure and industry boomed in 2003-07 and so the following five years were supposed to involve the reductions in expenditure necessary to repair a big hole in the national balance sheet. But, of course, the reverse has happened with infrastructure and industrial projects scheduled for the next 5-10 years now set to be completed over the next 3-4 years. This includes speeding up investments in the refinery and petrochemical industries. "China could be in for some rough times after the stimulus money runs out in 2011," the CEQ adds. Repair work to the national budget might not be the only reason why longer-term prospects could be a lot bleaker than many expect. China might also fail to boost domestic demand sufficiently to compensate for export trade which might take many years to recover. "For the first time in the 30-year reform era, China faces an extended period - five years or perhaps longer - in which exports will provide no significant contribution to growth," says the CEQ. The reason is the well-documented collapse in the West's debt-financed consumption binge. On the surface, it looks as if China is making great headway towards realising more of its enormous domestic-growth potential: retail sales grew by 16% in Q1 this year, up from 15% in the first quarter of 2008. If you dig deeper, though, as the CEQ again does, you discover that retail sales include many "institutional" purchases, meaning those by state-owned enterprises (SOEs). The government has increased military salaries by 50% and is providing rebates of 13% and 10% respectively off rural purchases of household appliances and automobiles. Despite all this cash sloshing about, however, when you take away the institutional purchases from the retail sales figures, the CEQ concludes that there is little evidence of a pick-up in consumption. Longer term, this can be fixed if efforts to create much better pension and healthcare systems lead to more spending and lower savings levels. Compared with the West, and particularly the US, the Chinese keep an awful lot more of their money bank deposits. But here's another potential pitfall: all that money sloshing around (the CEQ estimates the total stimulus will be worth Yuan5-6 trillion, or 15-18% - much bigger than the originally announced Yuan4 trillion) could end up creating another non-performing loans crisis similar to that of the early 1990s. This could force China's banks to lower interest rates on deposits in order to repair their balance sheets, warns Peking University finance professor Michael Pettis on his blog, China Financial Markets.As bank deposits are such an important method of saving money in China, lower interest rates could lead to more money being saved as compensation, leading to damaged consumer growth, he adds. Numerous economists are also warning that too much of the stimulus is in the form of loans to the SOEs, which can be less efficient in boosting the economy than private companies. The private sector, hammered by the collapse in export trade, is in contrast reported to be struggling for finance. An inevitable slow down in bank lending, the result of the huge rise in loan growth during Q1, could also be put yet another brake on the economy. "RMB (Yuan) net lending fell sharply to YuanB592bn in April from YuanMB1.9tn in March, broadly consistent with our expectation," writes Jun Ma, Chief Economist Greater China for Deutsche Bank, in a report. "We believe this reflects the success of the window guidance by the PBOC (People's Bank of China) and the CBRC (China Banking Regulatory Commission) that advised banks to "appropriately control loan growth"; the decline in new project approvals; as well as the slower pace of equity capital injections from the central government budget. "Going forward, the continuation of these factors will likely lead to a further decline in net lending to about Yuan300-400bn per month in the remainder of this year." A further worry remains the potential global deflationary effect in H2 of China stockpiling raw materials, including perhaps chemicals and polymers. Imports of polyethylene (PE) and polypropylene (PP) have, for example, been at record levels in Q1. However, it's impossible at this stage to say whether this involves major stockpiling or is more the result of better demand and big production cutbacks by Sinopec and PetroChina earlier this year. In the case of iron ore and copper, though, the steep rise in Q1 imports (iron ore was up by 33% and copper by 62%) are being widely attributed to state-backed inventory building and strong investment demand. "China is stock piling commodities - everything from metals to oil," said a chemicals industry source. "The argument is that it's better to store financial reserves in commodities rather than US dollars." "There has also been some stock piling of gasoline and diesel in anticipation of price increases by the government." Gasoline and diesel prices were indeed increased from early June - the first time since March. But if you put five economists in a room, goes the old adapted saying, you are likely to get at least ten different opinions. It can be just easy to interpret some of the recent data in a much more positive way, and it might just be possible that the current euphoria will create a self-fulfilling prophecy of a sustained recovery. It's worth being aware, though, that a 50% rise in the local stock markets since the start of the year and lots of positive macro-economic news might not tell the full story. ]]> http://www.icis.com/blogs/asian-chemical-connections/2009/06/china-borrowing-growth-from-th.html http://www.icis.com/blogs/asian-chemical-connections/2009/06/china-borrowing-growth-from-th.html Business China Company Strategy Europe Polyolefins US China Economic Quarterly China economic stimulus commodity chemicals copper Deutsche Bank iron ore non-performing loans crisis Wed, 03 Jun 2009 12:16:53 +0000 Source:Amazon.com I remain perplexed by the direction of chemicals, oil and commodity markets over the last few months - and now I understand the reason why. It's not about feedstock, it's not about inventory levels or what end-use demand is really like, it's all to do with affairs of the heart. Thanks again to my fellow blogger Paul Hodge who writes: The Illicit Encounters website has a major increase in traffic when either the market collapses, or has a sudden rise. Apparently, when markets are up, traders "think they can have an affair because they feel they can get away with anything. When the market hits the bottom, they are looking for a way to relieve the pressure." The site first came to the blog's attention in December, when the Financial Times reported on its rather lucrative business model - a male membership fee of £119/month ($190). Now it appears to have forecasting potential too. As with financial markets, surely with c hemicals pricing. All we need to do is to produce an index, on a confidential basis,of course, which tracks this particular form of intra-industry activity. ]]> http://www.icis.com/blogs/asian-chemical-connections/2009/06/an-affair-to-remember.html http://www.icis.com/blogs/asian-chemical-connections/2009/06/an-affair-to-remember.html Business China Naphtha & other feedstocks Oil & Gas Financial Times illlicit encounters International eChem market sentiment oil prices paralysis by analysis Mon, 01 Jun 2009 12:42:24 +0000 Source of picture: The Nymex To continue the same theme of earlier this week, I agree with my fellow blogger Paul Hodges when he warns that OPEC's price target for $75-80/bbl could nip the nascent economic recovery in the bud. As he quite rightly argues, inventory building ahead of further crude rises in 2007-08 occurred despite evidence of slowing end-use demand for chemicals. A recent Lex piece in the Financial Times calculated that crude prices averaged around $100/bbl last year. With the world consuming a total of $88m bb/day this therefore cost the world economy $3.200bn. When the article was written earlier this month, prices were averaging around $50/bbl which would for the whole of 2009 represent a saving of $1,600bn. This is more than the total of all the government bailouts - $1,600bn - and the bailouts are one-offs rather than the constant savings resulting from cheaper crude. This year's crude bill looks likely to be more expensive that had seem the case in early May, though, as a result of oil around $60/bbl, assuming it stays around this level (one hell of a big assumption but hey, why not, the rest of the media has become adept at turning a short-term trends into a long term outlook). As the excellent Schork daily oil and gas report points out, oil and gas inventories remain at record highs. But traders are ignoring the underlying long term trend in favour of putting a positive spin on recent relatively minor reductions in stock levels. As the report points out, it's all about market psychology: What started out as a bear market rally in equities back in March is now in the process of morphing into a full fledged rally. Sidelined money, disgruntled and dismayed that it has missed the bull's party of the last two months, is now reluctantly piling back into the market. Some of this money is finding its way onto the NYMEX. The Street has convinced itself the recession is over. Two months ago traders were buying because they wanted to "participate" in the equities rally before the bear market resumed. Today these same traders are spinning a dubious fundamental case because dour economic headlines, which the market receives nearly daily, are less bad. Thus, the crude oil bulls have hitched their wagon to the equities. And, they are going to continue to do so until it stops working for them. I remain convinced this is just about market psychology and the economic news is going to get worse before it gets better - so prepare for a lot more volatilty in energy pricing. A sharp dip in crude would help inject some more much-needed cash into the world economy. But - again as Paul Hodges points out - if crude does reach the OPEC target of $75-80/bbl this will at least encourage some of the investment necessary to lessen the supply crunch when the economic recovery has conclusively arrived. ]]> http://www.icis.com/blogs/asian-chemical-connections/2009/05/history-is-about-to-repeat-its.html http://www.icis.com/blogs/asian-chemical-connections/2009/05/history-is-about-to-repeat-its.html Business China Company Strategy Economics Oil & Gas financial crisis Financial Times history repeats itself oil prices OPEC Schork Report Fri, 29 May 2009 06:17:34 +0000 ICIS training courses. And so as a bonus for our army of avid readers, here are my extended thoughts on the above: In the midst of the economic crisis it would be so easy to bury your head in the proverbial sand and forget that once the recovery does arrive, the same old feedstock-cost problems seem almost certain to re-emerge. "The profitability of your average Asian naphtha cracker with the right level of investment in derivatives was extremely good throughout 2007. This was particularly the case if you were processing C4s into butadiene," said an industry observer. "But in the first half of last year margins turned negative because of rising crude and naphtha costs. Every manufacturer down every product chain frantically built inventory because of the fear that oil would reach $200/bbl by the end of the year." Of course we all know what really happened: Crude prices collapsed in Q4 resulting in the biggest inventory losses in the history of the chemicals industry. Stocks simply had to be liquidated due to the non-availability of working capital. Governments are lavishing cash on stimulus packages in a desperate effort to return the world to business as usual. This might on the surface seem the sensible thing to do, but unless that money is spent wisely in boosting energy conservation and renewable technologies, a return to strong growth could hasten the return of $100/bbl plus crude. There's not much sign of smart investment in China. A surge in bank lending has been used to ramp up steel and aluminium production and provide the finance for manufacturers of finished goods to run their plants hard in order to limit job losses. China announced a $586bn stimulus package last November and then in March disclosed plans for heavy investment in ten industrial sectors, including refining and petrochemicals. "While the (investment) proposals may boost the economy, and thus energy demand in the short term, they could also lead to continued growth of energy-intensive industries in the medium to long term," writes the UK-based Cambridge Energy Consultants in an article on its website. The Obama administration has also come in for some pretty fierce criticism over a cap-and-trade-bill before the House of Representatives. Lots of emissions permits would be given free under the bill, offering benefits to coal-based electricity generators and other energy-intensive industries. Oil industry experts are queuing up to warn that the economic crisis has cut capital investment by the small independent oil companies in harder-to-get-at conventional crude reserves. The oil majors have slowed down development of unconventional sources of oil, such as the Alberta Tar Sands. OPEC warned at its recent meeting that the fall in prices was resulting in lower investment, and the Paris-based International Energy Agency estimates that spending on oil and natural gas exploration will fall by 21% this year over 2008. This would represent $100bn less spending on building reserves. The implications of a return of very expensive crude are obvious for Asia's petrochemical industry, which is largely naphtha-based. The Middle East gas-based producers would once again stand to benefit due to another surge in margins as, of course, global petrochemical prices are oil-driven. But what if everyone suffers? Could the return to crude in excess of $100/bbl re-awaken inflation, further stoked by excess liquidity resulting from government stimulus packages? The danger is that we might repeatedly see nascent economic recoveries nipped in the bud by surging energy costs. BASF announced last June that it was looking at making petrochemicals from biomass using its catalyst expertise, and said that it had made good progress at the laboratory stage. Numerous companies were also looking at methanol-to-olefins technologies, including ExxonMobil and LyondellBasell. China's coal reserves offer an opportunity to make methanol into large amounts of olefins and transportation fuels. Let's hope that cutbacks forced on companies by the financial crisis have not included freezing research into attempting to break the crude-petrochemicals link. Another concern is the long-term outlook for naphtha supply. The US announced new car and truck fuel-efficiency regulations last week, which, in the short term could increase the availability of the feedstock. By 2016, all new autos will have to meet a 39 miles per gallon standard (mpg) standard, up 42% from the current 27.5 mpg. Trucks will have to do 30 mpg versus 23 mpg today. "Europe was already heading for an enormous gasoline surplus by 2015 even before this announcement," said Paul Hodges, chemicals consultant with the UK based International eChem. Diesel demand in Europe has surged at the expensive of gasoline. However, the Europeans have been able to export their way out of gasoline surpluses due to shortages in the States. But these exports were already under threat from increases in US refining capacity and the mandated steep rise in ethanol blending, added Hodges. "The new fuel-efficiency standards will increase the pressure for European refinery closures, but in the interim there could be a disposal problem. "This could create the opportunity for cost-advantaged naphtha supplies into the hard-pressed European and US petrochemical industries." Eventually, though, refinery capacity will have to close because, as one Asian-based oil and gas consultant put it "there is going to be a worldwide glut of gasoline. Even on a straight-run basis before you look at more advanced processing, there will be a big surplus requiring rationalisation." It is far too early to say whether refinery closures will lead to a net reduction in available naphtha. Asia is adding capacity as Europe confronts the need to rationalise. In 2009-10 alone, 2.7m bbl/day of refining capacity is due to be come on stream in Asia Pacific, according to oil and gas consultancy FACTS Global Energy. But naphtha exports from the Middle East could decline as the region looks to crack more naphtha in order to widen its petrochemical-product slate. In Abu Dhabi, for example, a naphtha cracker complex is due to start-up by 2013. Anyone with either access to advantaged ethane, propane and butane or with a proven technology that breaks the refinery/petrochemicals interface might be OK during the next oil shock. The key for Asian liquids-based producers without either of the above must surely be maximising feedstock flexibility. This flexibility could include cracking more liquefied petroleum gas (LPG). LPG should be in abundant supply once liquefied natural gas (LNG) demand is booming again on higher oil costs and rising environmental concerns. LNG producers either extract the gas during initial processing or leave it in the LNG to be taken out at re-gasification terminals. Whatever are the solutions, they need to be found and found quickly if surging stock markets are proof of a quicker-than-expected economic recovery. ]]> http://www.icis.com/blogs/asian-chemical-connections/2009/05/the-next-oil-shock-and-petroch.html http://www.icis.com/blogs/asian-chemical-connections/2009/05/the-next-oil-shock-and-petroch.html Business China Company Strategy Markets Methanol & Derivatives Naphtha & other feedstocks Oil & Gas Olefins BASF crude-oil prices financial crisis ICIS training International eChem International Energy Agency LyondellBasell OPEC Sun, 24 May 2009 14:23:10 +0000 Maybe if cash flow remains constrained by ever-weaker revenues - even if the financial system is repaired - companies will face no option but to permanently shut down capacity and definitively cancel projects. The extent of the capacity closures to date suggests that markets being brought back into balance is possible far more quickly than the doom-mongers (including myself) expect. A few major bankruptcies might make this process very rapid indeed through closure of a large amount of a capacity in one fell-sweep. ]]> http://www.icis.com/blogs/asian-chemical-connections/2009/05/-consensus-opinion-tends-to.html http://www.icis.com/blogs/asian-chemical-connections/2009/05/-consensus-opinion-tends-to.html Business China Company Strategy Economics Markets Polyolefins BASF Bayer Material Science capacity shutdowns doom-mongers Dow Chemical financial crisis financial meltdown Mon, 18 May 2009 08:07:23 +0000 Process Systems Enterprise in this article in ICIS Chemical Business. A friend of mine has just graduated from university with a very good degree in chemicals engineering and has managed to land a job with an engineering company. His fellow graduates have not been as lucky in their search for jobs with chemical companies. At least somebody is making money out of this crisis ]]> http://www.icis.com/blogs/asian-chemical-connections/2009/05/its-about-scaling-down-rather.html http://www.icis.com/blogs/asian-chemical-connections/2009/05/its-about-scaling-down-rather.html Business Company Strategy Economics Environment Europe Projects Technology US chemical engineering ICB process optimisation unemployed graduates Thu, 14 May 2009 07:06:31 +0000 This very interesting note from Jun Ma, chief economist for Greater China at Deutsche Bank (see the end of this post) offers evidence to support what this blog has been worried about for some time - the quality of China's economic rebound. The government would presumably be less concerned about the sharp increase in loan growth if the extra money had substantially boosted domestic consumption. Instead, a large portion of the new loans could well have ended up in the hands of speculators (helping to drive chemicals prices up), Factories also seem to have been encouraged to keep operating rates high for social reasons - and state-owned enterprises area wash with cash for industriall investments. This is crowding out borrowing by private companies. My fellow, Paul Hodges, points out that Wal-Mart is actually reporting a decline in consumer spending at its stores in China. Net lending falls 70%mom to RMB592bn in April RMB net lending fell sharply to RMB592bn in April from RMB1.9tn in March, broadly consistent with our expectation. We believe this reflects the success of the window guidance (about 3 weeks ago) by PBOC and CBRC that advised banks to "appropriately control loan growth"; the decline in new project approvals; as well as the slower pace of equity capital injections from the central government budget. Going forward, the continuation of these factors will likely lead to a further decline in net lending to about RMB300-400bn per month in the remainder of this year. As lagging indicators, the yoy growth in outstanding loans remained at 29.7% in April and M2 growth accelerated a little to 26%. Within a few months, we expect these yoy rates will begin to moderate following the decline in monthly net lending. We see two main implications from the slowdown in net lending. First, net lending is a good leading indicator for QoQ GDP growth in China, with a lead time of about one quarter. The 70-80% fall in QoQ net lending in Q2 implies that QoQ GDP growth will likely moderate in Q3, following its peak in Q2 (at an annualized rate of 12-14%). Together with other factors such as a more visible corporate capex slowdown and a less supportive inventory cycle, it will likely result in a second phase of economic deceleration (measured on a QoQ basis) from Q3. On a YoY basis, the second down-leg of the economic cycle will likely begin in Q1 next year, as YoY growth lags QoQ growth by about two quarters. Second, net lending has a high correlation with market turnover in the A share market. The decline in net lending growth will therefore likely be associated with reduced liquidity for the A share market going forward. Yoy inflation falls further in April CPI inflation declined to -1.5% yoy in April, down from -1.2% in March. Producer prices are also declining, falling 6.6% yoy in April, vs a fall of 6.0% in March. Both figures are identical to our forecasts. In the CPI index, a 0.8%mom decline in food prices led the index down. Other commodity prices were essentially unchanged on the month according to the Ministry of Commerce. We expect yoy CPI inflation to remain in negative territory for another three or four months and PPI inflation to remain negative for six months. Upside risks to inflation stem from the possibility of higher wheat prices after a drought earlier in the year and the possibility of higher pork prices as farmers have slaughtered pigs in recent weeks due to the 10% drop in pork prices amid the Swine Flu outbreak (note that mainland China reported its first confirmed swine flu case today). Month-on-month PPI inflation - much more influenced by non-food raw materials prices - should recover on stronger demand due to rising gov't-led capex and inventory restocking in coming months, but these price increases may not be sustained beyond mid-Q3 when we think the QoQ increase in the number of new projects starts to fall and the inventory cycle turns less favorable. ]]> http://www.icis.com/blogs/asian-chemical-connections/2009/05/net-lending-declines-by-70-80.html http://www.icis.com/blogs/asian-chemical-connections/2009/05/net-lending-declines-by-70-80.html Business China Economics Markets Olefins Polyolefins China's economic recovery. China's bank lending China's economy China's false recovery Deutsche Bank inventory management Tue, 12 May 2009 05:42:43 +0000 The current run-up in equities might go on and on - perhaps even for several years, according to economist Russell Napier. But he warns, in this excellent video interview with FT journalist John Authers, that an extended boom in equities doesn't necessarily mean the economic fundamentals are sound. For example,the stock market rally after the dot com bubble burst was fuelled by too-lax lending. Was this in effect a bear-market boom? Now governments are pouring money into economies the world over to stimulate consumption. This will lead in perhaps as long as 2-3 years time to a big inflation problem, the Chinese losing their appetite for US Treasuries, Treasury yields doubling and a cataclysmic bear market with the S&P falling to 400. Until then, S&P could easily double from its March low, predicts Napier Do you have the courage to stick your money in and wait? It still feels counter-intuitive that the current run-up will last a few years given the scale of consumer and corporate debt. But since when has logic had anything to do with anything? ]]> http://www.icis.com/blogs/asian-chemical-connections/2009/05/how-long-can-bear-market-ralli-1.html http://www.icis.com/blogs/asian-chemical-connections/2009/05/how-long-can-bear-market-ralli-1.html Business China Economics Markets US bear-market rally financial crisis Financial Times Russell Napier S&P US Treasuries Mon, 11 May 2009 13:26:49 +0000 The timing of when to strike the ball is everything in the wonderful sport of cricket - and also, apparently, in the American pastime of baseball. An Australian banker is fond of reminding the English how much better his country is at playing cricket. But his gloating doesn't extend to how well he's been timing dipping in and out of equity markets of late. Like a lot of other "cashed up" people he is suffering from the "if only" syndrome. "A lot of money seems to be pouring into stock markets because it has nowhere else to go. I didn't expect this run to last as long," he said. All the moving indicators are pointing upwards with crude above $55/bbl on Thursday where he thought there would be very tough resistance. "There's so much crude in storage which has been acquired by the financial traders who perceive the economic recovery is just around the corner. This is a big risk. "Equity markets are also responding as if a recovery is only three months away. They usually price in a recovery about a quarter ahead of when it actually happens, but I believe that the recovery - or rather the bottom of the market - is at least six months away." And in his view, you have to be very careful how you measure "recovery" in the context of the worst economic downturn since possibly the Great Depression. The first important measure is the effect of inventory adjustments on GDP (gross domestic product) growth. In the US, for example, total inventory reductions subtracted $50bn from growth in the fourth quarter of last year, he said. The first quarter adjustments will see a further $100bn or so of production cuts and the second quarter possibly in excess of $150bn. The collapse of liquidity in Q4 2008 forced companies across all sectors to make much quicker operating-rate cuts and plant closures than occurred at the start of previous recessions. "There was simply no re-financing available so the companies had no choice." BASF has reduced is global production by 25%, Bayer Material Science has taken 300,000 tonne/year of polycarbonate (PC) capacity temporarily off-line and Dow Chemical's average operating in the fourth quarter was just 64%. "I expect some inventory replenishment down many of the production chains in Q3 in the US, and probably elsewhere," he added. "This could give the false impression that we have reached the bottom of this crisis and recovery has begun." Inventory building in Q3 would need to be measured against consumer spending, he said. Retail sales on big-ticket durable items such as autos and homes might take longer to bounce back in the West than in Asia. Cost consciousness could also extend for some time to clothing, food and tourism. Individual wealth has been badly dented by the fall in stock markets relative to their peak and the collapse in housing. "Savings rates are likely to continue increasing as a result of this loss in wealth - even more so if unemployment keeps on rising." Recoveries in GDP growth in the third quarter of this year would also need to be measured against the same period in 2007 rather than 2008, he added. "This will give us a measure of how far we are away from returning to the boom conditions of 2004-07." The crisis began in the third quarter of 2008. Any comparison between Q4 2009 and Q4 2008 would be even more misleading as the global economy ground to a virtual halt during the last quarter of last year. Comparing 2007 with 2009 is crucial for the chemicals industry as new capacity was planned on the belief that growth would continue at levels close to the great boom years. "Even if were still in a global boom we would still need capacity to shut down," said Paul Hodges, chairman of UK consultancy International eChem. "In most building block products we are now faced with 20% oversupply." It could be a very long time before the world economy enjoys another period like 2004-07. Consumer and corporate credit is likely to remain much more restricted because of financial-sector reforms. "You also have to look at the potential for credit-card debt going bad to undermine consumer spending and the stability of the banks," the banker added. "The first quarter results of the Western banks were very misleading. They looked good because of a reduction in competition due to consolidations and bank failures. (Also, the banks could hardly fail to make money as governments were practically giving money away) "But behind the numbers you could see warnings over just how much bad debt could result from credit-card defaults. "As much as 25% of the revenues of some commercial banks come from credit-card transactions." Consumers who are not in danger of default will be eager to pay off their plastic debts rather than incur 20% interest charges, he said. The other big risk is the rate of recovery on corporate debt that's gone bad. Optimists think it could be as high as 40%, whereas others are warning of returns of as low as just a few cents on the dollar. There appears to be the risk of a least a double-dip recession - perhaps even three dips. Commodity chemicals prices started going up before the current equity-market rally. This followed the deep global production cuts in aromatics, olefins and derivatives and a rebound in feedstock costs. It's a moot point whether the cuts, combined with delayed start-ups in the Middle East, created genuinely tight markets or just the perception that they were tight. In the end, though, the result was the same - raising the age-old conundrum of whether sentiment or fundamentals are driving markets. A danger is that rising crude prices and the stock-market rally could lead to chemicals production being ramped up (if it hasn't happened already), despite the uncertain outlook for consumption. Confidence can be a dangerous thing. It's a great deal easier to off-load shares when you think the market has turned than a warehouse full of polyolefins. ]]> http://www.icis.com/blogs/asian-chemical-connections/2009/05/an-aussie-stumped.html http://www.icis.com/blogs/asian-chemical-connections/2009/05/an-aussie-stumped.html Aromatics Australia Business Economics Markets Polyolefins US credit-card debt cricket fiscal stimulus house prices housing markets inventory management Q1 bank results The Ashes Sat, 09 May 2009 16:25:54 +0000 "Nobody can see until the end of the month - never mind into the third quarter," commented an olefins trader recently. "The reason is that very senior managers are too busy micro-managing everything, from getting involved in trying to track commodity chemical price direction to insisting on signing off every expenditure over a few hundred dollars. "The problem with these senior guys when they track markets is that they are so out-of-the-loop - assuming that they have ever actually been in the loop - that they don't know what they are doing." I heard of one big company where the CEO has even insisted on signing off travel authorisation to next week's APIC conference in South Korea. In these days of tight credit and collapsed sales, it's understandable that much tighter control on spending is essential. And during the boom years, can we all honestly say that every single trip we made was entirely commercially justified - and that we were always sufficiently foused on the bottom line to get maximum value out of each trip? Look back at your old expenses forms and count up the number of genuine "drinks with Mr Kim" entries. It will be interesting to see how the lessons being learnt today will be remembered when the economy has fully recovered. But from a HR perspective, a tough sign-off regime needs to be well-communicated. So does the senior guys tracking shifts in chemicals pricing - whether competently or incompetently - otherwise the workers on the ground are likely to become demoralised. They are unlikely to be able to leave in this current climate, but will surely perform far worse if they feel their opinions are being ignored for no good and well-explained reasons. Off-the-record, of course, how does your company measure up? And did you fiddle your expenses during the good times? ]]> http://www.icis.com/blogs/asian-chemical-connections/2009/05/micro-management-gone-too-far.html http://www.icis.com/blogs/asian-chemical-connections/2009/05/micro-management-gone-too-far.html Business China Company Strategy Economics Europe India Indonesia Japan Knowledge management Malaysia Managing people Markets Middle East Philippines Singapore South Korea Taiwan Thailand US APIC CEOs commodity chemicals credit control financial meltdown human resources micro-management Fri, 08 May 2009 06:26:49 +0000